John Lee

Thank you, Michelle. Let me now turn to our fourth-quarter outlook. We expect revenue of $910 million plus or minus $40 million by end market. Our fourth quarter outlook is as follows. Revenue from our semiconductor market is expected to be $380 million plus or minus $15 million. Revenue from our electronics and packaging market is expected to be 240 million plus or minus $10 million. And revenue from our specialty industrial market is expected to be $290 million plus or minus 15 million. Based on anticipated revenue levels and product mix weeks, we estimate fourth quarter gross margin of 47% plus or minus 100 basis points. We expect fourth quarter operating expenses of $240 million plus or minus $5 million. We estimate adjusted EBITDA of $226 million, plus or minus $23 million. We expect a tax rate of approximately 6% in the fourth quarter, benefiting from certain favorable discrete tax items in the quarter. And bringing our full-year tax rate to just under 16%. Based on these assumptions, we expect fourth quarter net earnings per diluted share of $1.95 plus or minus $0.32. Our execution has remained strong. Despite the cyclical challenges in our end markets, we were confident that we’re uniquely positioned to capitalize on the opportunities that lie ahead. With that, operator, please open the call for Q&A.
Thank you. At this time we will conduct a question and answer session. As a reminder to ask a question, you’ll need to press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one. Once again, please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew personnel of cancer were line is now open. Hey, guys, thanks for taking the question. I guess maybe to start on your semiconductor business, can you maybe have some more color on what you’re seeing from whom customer utilization rates, their business ordering patterns or anything else that may help inform an early view into 2025? Downticks? Mads, John, thanks for the question. I think we’ve continued to see utilization rates pick up. Certainly, HBMDRAM. utilizations have been great nodes. And so we’re seeing the same things that many people have talked about. Logic and Foundry, a certain customers remains very strong and Anand remains muted. So I think you know, when you think about 2025, I think the views have come down over the year, but it’s still a generally and appear that’s being from many of our customers and what they’re telling us. So I think Dan still remains muted and depends on when that turns, both foundry logic, D ram seem to be holding up well and the expectations that it will hold up well in time, 25 as well. That’s helpful. And then on wood, hopefully a little bit more color on your progress in the photonics initiatives and and then also given the given the push-outs experienced by some margin lift or player and this change will ramp expectations around your new photonics one and subsequent duration of that margin. Thanks. Right. So we we talked about last quarter of autonomous when this quarter we talked about I know the Photonics win with a different customer. So this is the lithography metrology inspection space. As you know, certainly the lead times for those kinds of subsystems as well as, of course, the systems are much longer than in the vacuum area for WFE spend. So short term, I don’t think there’s really any effect because of the lead times are quite long for our stuff as well as their stuff. So longer term, of course, market demands will determine what the long term these are for a critical lithography tools, metrology tool, metrology tools and inspection tools. So I think our point is there’s lots of opportunity there to gain share with the technology will provide. We think we’re unique because we can bring more tools to the toolbox, integrating different case kinds of technologies together that makes us unique. So longer term, we’re still very excited about our growth and world-class optics initiative as well as the market share gain opportunities in this segment of WFE. Very helpful. Thank you. Thanks, Matt. Thank you. Our next question comes from the line of Steve Barger of KBCM. Your line is now open. Hey, good morning, everyone. At the looking at the guidance at the mid point, gross margin steps down about 100, 20 basis points sequentially. Is that mix or can you talk through what the swing factors are around that range? Yes, Steve, thanks for the question. It is mix. We expect to electronics and packaging revenue to be a little higher next quarter. As we just said that a lot of that is driven by equipment. So we did see some of you had some promising orders in Q2, three, four equipment related to a I this is equipment that’s servicing all segments of the TCV industry, the HDIMLB. and then the package substrate. And as we’ve talked about in the past, to make an AI. board, you need a package substrate. Of course, that’s the highest density, that type of mode advanced part of the PCB industry. But then you’ve got to put it on HDI. and then we’ll be boards. And so I was quite interesting for us to see some of our customers start ordering for those applications. And so that equipment revenue will flow through into Q4. And as you know, our equivalent gross margin slightly lower than the chemistry. So that’s really part of it. It’s really that mix. Got it. So encouraging, but a little lower margin on the equipment. That’s good. And maybe a question for Ron. You’re coming into a situation where markets are recovering, but there’s still some uncertainty. How are you going to balance cost control versus the market share initiatives that we’re talking about inventory levels, just to make sure that service levels are high. Maybe just talk about what’s you’re prioritizing as you go through the next few quarters? Yes. Thanks to this. A great question. I think it’s always a balance between meeting your current quarter and forecast guidance and making sure your long-term strategic plan, new initiatives are well funded and resourced. So we have done a good job in maintaining our cost discipline, and my immediate focus will be to make sure that continues. The margin progression continues and the cash generation, but we have demonstrated keeps growing so that we can strengthen our balance sheet, our debt management. So those priorities don’t change will remain our focus here. I would add to Steve that we’re really investing where we think the best opportunities are. So R&D is not starve. The we expanded our fuel service to service the growing base of equipment as well also throughout his point is always a balance. But so we are certainly very aggressive in putting money into opportunities as we see them. And some examples where our Power five years ago and world-class optics more recently as well as lasers and other opportunities that come about as the markets change. And just to add one more thought to what John just said, we are not starving our CapEx or are we continue to invest in the business, both in CapEx and in the P&L outlook, though John served. So those activities and focus will continue. Appreciate the detail. Thanks. Thank you. Our next question comes from the line of Jim Ricchiuti of Needham & Co. Your line is now open. Hi, good morning. This is Chris Crane. Go on for Jim. Thank you for taking my questions. Could you elaborate on what you’re seeing from a from a demand standpoint in some of the primary industrial end markets, in particular automotive? And could you remind us what here of of revenue is exclusively for enabling easy type applications? Thank you. Thanks for your question, Chris. So there are always see in automotive is certainly more muted. That’s not a surprise that’s well documented. Our automotive revenue has been pretty stable, though, even in this muted environment. And this is really the GMS business into the kind of brake calipers and decorative type of things that go into cars, both ICE and EV. We haven’t broken out EV versus ICE. I think there’s a lot of opportunities that arise with EV, such as all the components are go into the battery that require Metal Coatings. So those are opportunities, tailwinds and then some things go way such as you perhaps as much chrome on the front of the grill. So there’s puts and takes right now. We think that EV.s offer a slightly better opportunity for our GMS business, and that’s not even adding to the electronics part. So they’ll Tronox part for automotive. It’s really still not categorized in the automotive part of our business is really part of our electronics business so far. So automotive units are down worldwide of, but our business there seems to be Holden up pretty steadily. Thank you. And given given some of the concerns that were not worrying about in terms of WFE spend in on in China in prospectively on, can you offer any sense of how much your business in semiconductor, either directly or indirectly arm is it is exposed to that region? Sure. zero in 2020 to October 2022. That’s when it affected us the most because it restricts specific equipment OEM customers in China. And we had talked about that publicly to the order of 200 million. That’s a that was at risk. So those numbers are out of our numbers now that are now for two years now. So so there’s no additional risk besides just the normal WFE market of China. And we’re selling indirectly, we’re selling to the fire big equipment OEMs as well as others. And as a ship to China, then that’s where our revenue comes from. So we really look at the exposure is much more in line with the market exposure, not anything particular to MKS. Great. Thank you very much. Thanks, Chris. Thank you. Income from owning it became requests of losing oil, Calando and Unidym. Yes, hi. Thanks for letting me ask a question. A couple of questions. When you look at the March quarter, just wondering how the cities that are you on the theme of the seasonality. And then just big picture on 2025 on WFE on some of the puts and takes within the China restrictions and the SEC as Mr. the new administration, how are you thinking? Yes. I think your first part was about any cyclicality or seasonality, sorry, in Q three. There is always a little seasonality to our chemistry business for electronics because it has that consumer product cycle to it. So chemistry was higher, but it was even higher year over year in Q3 as well. So that was that the normal seasonality, we kind of expect chemistry to kind of moderate a little bit in Q4 just because of seasonality. But as you because we just talked about E and P is up and a lot of that’s driven by E and P equipment. So so those are the puts and takes of seasonality. With respect to a 2025 WIC., I think your question was since the election change anything and certainly some of the last smarter people that can have opinions on that. I would say that I see it as specifically in terms of how the geopolitics will shake out. That’s been a buyback. Contrary to that in a particular semiconductor restrictions. So whatever that was going to be going forward, we don’t expect that to change to decide what I’m wondering planning in terms of pare down to 25, I guess in terms of leverage in the balance sheet? Yes. Well, we’ll certainly be that store in AM. On Friday. We will be using our excess free cash flow. A focused to delever will certainly do other things such as repricing and whatnot, if it makes sense if the market allows for. So our focus for the next 12 to 18 months, as we’ve said before, is to really focus on delevering with any excess free cash flow. How much added, of course, will depend on the markets, as you can see in 2024 with a very muted market for semiconductors and electronics and packaging are two main markets. We were still able to pay. We pay 426 million. And so there’s a lot of leverage in our model. Certainly of revenue were to go up significantly as a lot of that will flow through to the cash. The free cash flow, as Michel said, this quarter, it was 16% of revenue. Free cash flow. Thank you. Thank you, Jay. Thank you. Our next question comes from the line of Krish Sankar, ITD. Cohen. Your line is now open. Yes, hi. Thanks for taking my question. I had two of them, John Alm. one of the things you mentioned was are you saw strength in semi business in DRAM, logic and foundry, not demand on kind of figure out then. Do you expect to see nonsense because some of your other component peers, like Michael said that the beginning to see in oh nine soon for the business? And kind of curious on is there a lag effect? I will begin to see anything or is it more of a 2025 event? Thanks for the question, Krish. So we can’t comment on what other peers are seeing. We can come and what we’re seeing and I think what we’re saying is still feels very muted. You know, some customers are tied to about upgrades and things like that. And upgrades coming couple of different flavors, right to upgrade a significant increases in layer count. You really need new RF power, but you can also upgrade with smaller changes and that may not require a new RF Tech as much as required by our chemistry or cryo. So I think that all depends on what the customers see and what their customers want them to do some. But right now we are seen and still keep us pretty muted. So that’s that’s all we can say about what we see. Got it. Got it. That’s very helpful. Armed with a quick follow-up, John, if I remember right, you said that the E & P’s strength was in flex PCB drilling. I hope I heard it right, because the question was mainly either six DCBs mainly used for smartphone end markets, but it seems like the market hasn’t quite recovered. Some benefit about what drove that strength for you in the quarter? On the E&P side. And then I just wanted to also say that our welcome to the team, Ron, I hope to integrity and one of the future. Thank you. Thank you, Chris. Look forward to more conversations? To answer your question, Krish, they’re actually two things that are driving E and P up quarter on quarter. It is both the flex equipment. So for smartphones, you’re right there. So we did see an increase there in bookings, and that’s going to turn into revenue the next quarter or so. And in addition to that, we saw an increase in bookings for rigid PCB equipment for chemistry related to a I so it’s actually both that are happening. Got it. Thank you. Yes, thank you. Our next question comes from the line of Joseph Moore of Morgan Stanley. Your line is now open. Hi, this is Shane. On behalf of Joe. Thank you for letting me ask a question from my first question is how should we think about theaters, idiosyncratic gross margin tailwinds and headwinds that you’re envisioning for 2025 and two? Yes. Gross margins in 2025. Certainly you can see our gross margins. We are slightly different by division and chemistry. And the Outotec acquisition has really helped keep the profitability up even during a downturn, so a downcycle. So we’re really happy about that. And it’s improved under MKS the last two years, the gross margin for particularly volume of business that I will take has improved. That’s also the case with PSC is the case with DST, the volume will improve all of them. And so 2025 volume is higher. We should expect that 30% gross margin flow through that. We’ve talked about our model. And then, of course, the inflationary costs have come down over this year. So the PPV. is pretty much balanced. Now it’s not back to where it used to be where we can always count on some kind of one or 2% lower PPV. year on year, but some parts of the supply chain and some parts of the materials are getting to that point as well. So right now is still in balance. And so that could be a tailwind. Of course, if inflation goes up, it’s a headwind. So those are the things we think about in terms of gross margin drivers onshore. Got it. Thank you. My follow-up is so non-CapEx events to returns. How is MKS. acquisition that customer tools sort of relative to last up cycle in 2023 transferred to? Thank you very much. Yes, we believe we still have the leadership position for certainly some of the most, the most critical etch in demand with our power. And so we’re pretty confident that the next upcycle. So that was that we will enjoy that with our power business. You’re probably talking about new kinds of power such as Part DC. that we’re working on that as well as others. That will remain to be seen as to when that gets put into production, but certainly not probably the next cycle. Thank you. Thank you. Our next question comes from the line of Joe Quatrochi with Wells Fargo. Your line is now open. Have actually in the questions. I know you guys announced kind of a new semiconductor factory you’re building in Malaysia. But wondering if you could talk about one evidence that the CapEx requirements there over the next few quarters, we think about excess free cash flow for debt paydown. And then also, how do we think about the mix of their production? I think you a lot of your semi related production capacity is located in China? Yes, Joe, it’s a great question. So we we announced a groundbreaking in Malaysia for another factory to target towards our semiconductor and maybe even photonics types of products. And that’s, you know, expansion for capacity that we think we will need, certainly putting less risk in our footprint, our manufacturing footprint, and that’s certainly something our customers want to see. So those are the two reasons why we’re doing that. In terms of CapEx, I think the way to think about, Joe, is we’ve always been in that 3% to 5% a level in terms of CapEx spend. So very, very low and maybe the next year to edge up towards the five because we’ve got a couple of factories being built for good reasons. But you have that percent range. And then you know, it could oscillate between three to five, but still quite a low CapEx intensity, a model that we have. That’s helpful. Then I guess you guys obviously guided December, but how do we think there’s anything and call on terms of seasonality into the March quarter? The March quarter usually is a little lower from a consumer product cycle standpoint. That’s true. So that’s typically what we would see in part of our CAT MSD. Outotec business, just like we saw an uptick in Q three. So that that’s the expectation. Things can change. Certainly a new product release of some sort of change there. And I think the only kind of difference is equipment equipment is not necessarily consumer products cycle, right? It’s just it’s an investment cycle and capacity cycle. And so that’s where we see kind of a Q4 uptick in E and P because of not just less equipment, but also originated equipment. And it means we’re seeing what that will be in Q1. Got it. Thank you. Thanks, Joe. As a reminder to ask a question or an additional question, you’ll need to press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our next question comes from the line of Melissa weathers of DB. Your line is now open. And I thank you for letting me ask a question and look forward to working with the ramp. And I think I heard in your preamble that you talked about a back end when for each beyond. Can you give us anymore color on what that is, how big it can be on? And do you expect any other smaller ones? Yes. Thanks, Melissa. The HPM when we talked about with lasers. And so lasers, it can be used are used to do cutting of chips. That’s not news, but HBM. type of DI, you’re putting died on topic of each other. And so precision and finance of the hedges and all that are giving laser makers U.S. opportunities because the more precise you can make those cuts for better yield you’re going to have on those kinds of chips. So we called out one particular customer and it’s pretty significant. But, you know, homecare some pretty big. So but for the laser group, it’s significant and it’s not just one customer. So it’s multiple customers do this. Got it. And then on the like advanced logic side, you said you saw strength in the quarter there. And it’s pretty clear that from the main player, they’re seeing strength that the two kind of second-tier foundries are struggling. So any way that we should think about if that market and proceed to just one major player, how would that impact on cash and our derisking fair for that dynamic? Yes, I think we’re not too worried about that, Melissa. I think the reason is because we’ve been in a consolidating industry for 30 years. And so you could argue that there were 32 companies, other five, there were dozens volumes. Now there are five. So certainly we want to provide the best value to our customers, but we also want to get paid for the fair value that we bring. And as you can see, our gross margin since our you know, in the same zip code is, if you will, as our customers that our customers’ customers. And I think that’s just a corroboration of the value of technology that we bring. And I think a lot of companies that bring this kind of technology, you need those kinds of gross margin, so you can invest in the next generation. So we’ve been able to demonstrate that over 50 years. And so yes, there could be consolidation and whatnot throughout the industry. But so we feel that the value of our portfolio is really going to be what the terms of gross margin. Thank you. Thank you, Melissa. Thank you. Our next question comes from the line of Steve Barger at KBC norm. Your line is now open. Hey, thanks for the follow-up. John, when you think about the initiatives around photonics are lit, though or some of the other growth areas you’re targeting. Can you talk about how this affects the market opportunity for you, whether it’s growth rates or or how this affects the TAM longer-term? Yes. I think it’s really back to the playbook we’ve we’ve demonstrated over the last 10, 15 years, Steve, there’s there’s only so many ways you can outgrow WFE, and we’ve demonstrated that we could do that for 200 basis points more recently. We’ve had headwinds, China rig lot of that, Scott, I removed. So we had to make it up somewhere else in that. So I think with Argosy metrology inspection, that was a great area where as a company, we were less index to that than than our contribution to the vacuum part of WFE. So that’s where we made the investment. And we’ve seen demonstrated that we can continue to outgrow even that subsegment of WFE, and we have been over the last couple of years. So that’s just an example of the plan and the playbook of growing do you have to move to with opportunities are. And I think that is also really the strength, leveraging that strength of having a broad portfolio, you can move to those areas much faster because you’re already on them. Understood. Yes. Thanks. Appreciate that. Thanks, Steve. I’m showing no further questions at this time. I would now like to turn it back to Paretosh Misra, Vice President of Investor Relations for closing remarks. Thank you all for joining us today and for your interest in MKS. Operator, you may close the call. Please. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Okay. Okay. Um, we are. Thank you. Yes. Okay. Yes, yes, yes. No? Yes, no, yes. Yes, yes. Okay. Yes. Okay. Yes. And so on and so on. Yes. Okay. No? Yes, yes. Of of of of. Okay. And. Thanks. Of. Thanks. This conference call. At this time, all participants are in a listen only mode after the press star one on your telephone. You then you have to withdraw your question, please press star one. Once again, please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Paretosh Misra pad. Good morning, everyone. I’m Paretosh Misra, Vice President of Investor Relations, and I’m joined this morning by John Lee, President and Chief Executive Officer and Chief Financial Officer and Treasurer, and Mr. McCarthy, Vice President and Chief Accounting Officer. Yesterday after market close, we released our financial results for the third quarter of 2024, which are posted to our investor website at investor dot ipass.com. As a reminder, prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday’s press release and in our most recent annual report on Form 10 K. These statements represent the Company’s expectations only as of today and should not be relied upon as representing the Company’s estimates or views as of any date subsequent to today. And the Company disclaims any obligation to update these statements. During the call. Unless otherwise noted, all income statement related financial measures will be non-GAAP other than revenue and gross margin. Please refer to our press release and presentation materials posted to the Investor Relations sections of our website for information regarding our non-GAAP financial disclosures. Our Investor website also provide a detailed breakout of revenues by end market and division. Now I’ll turn the call over to John. Thanks, Josh, and good morning, everyone. I’m pleased to introduce and welcome our new CFO. Ron joined MKS in October and is actively diving into the business, engaging with our business leaders and are really contributing to our strategic initiatives, be instrumental as we continue to drive growth and execute on our long-term strategy. From a share. Some brief remarks later on this call, and you’ll take the lead into will handle the financial results today. And I’d add that she’s done a terrific job for MKS during this transition period. Mks delivered a strong third quarter was all key financial metrics at our gross margin strength reflects the value of our broad and differentiated product portfolio, including our chemistry revenues, which have supported profitability during a period of muted semiconductor demand. Additionally, our operating model profile demonstrates our continued cost discipline. We have also made meaningful progress on our highest priority, proactively managing our leverage during the quarter, we repriced our USD and euro term loan B is reducing our interest rate by 25 basis points, and we continue to actively pay down our debt, supported by our strong free cash flow generation of overhead 140 million in the third quarter. These elements to 426 million sorry, my recent travels to Asia and meet with customers. We discussed many of the key trends and challenges, especially as many of them prepare for the next generation challenges in a related advancements as node sizes continue to shrink and technology grows more complex. The importance of our broad portfolio and our customers recognize this. As a result, I came away from these conversations even more confident that our differentiated capabilities will accelerate our customers’ roadmaps and lead to their performance in our three end markets. In our semiconductor market, revenue increased 3% sequentially and above the high end of our guidance range. Similar to our first half results. This higher revenue trend was primarily driven by in-quarter Dominion conversion related to GRAM. and logic foundry applications. Nan has remained rules, and we remain well positioned when that market recovers. Our teams are engaged with equipment OEMs and leading semiconductor fabs in addressing a broad range of technology inflections, logic and memory applications. High aspect ratio, etching from memory devices, selective removal processes for logic gate all around transistors. Additionally, we continue to see metrology and inspection following the strategic photonics. When we talked about last quarter, we recently achieved a design win for our world-class optics initiative with another customer that further capabilities in this attractive segment of the WFE market in our laser business related to high bandwidth memory validating. However, we expect semiconductor revenue to be flattish on a sequential basis. The guidance demonstrates continued stability in DRAM and logic foundry demand with Nan remaining at low levels. Overall, we remain confident that the work we have been doing in the Gulf. We have innovative solutions for the next well for the future success. Turning to the electronics and packaging, revenue grew 1% sequentially, driven by chemistry sales. Equipment sales were down sequentially in line with our expectations. While demand overall remains muted, we are seeing encouraging order activity, including and flexible PCBs really used in smartphone applications and for our chemistry and the HDI. and package substrates related AI applications. Our combined expertise equivalent enables our unique role in up summarizing the interconnect, which is central to addressing increasingly complex packaging needs in the AI era. These wins are expense in Q4 with growth anticipated to be in especially industrial market revenues decreased approximately 1% sequentially with steady profit markets offset by softness in the life and health sciences market. As a reminder, our specialty across multiple end markets, we leverage our proprietary technologies and R&D investments to provide unique solutions that yield strong incremental margins and cash generation. Looking ahead to Q4, we expect revenue in our specialty industrial market to increase slightly from Q3 execution and financial performance in the third quarter, giving us strong third-quarter results and our fourth quarter outlook. We now expect second-half revenue to be up low to mid single digits compared to have not yet emerged across our end markets. Our execution remains solid in the areas we can control solid cash flow generation to support debt reduction throughout a year where our major end markets have been fast. This along with our design wins and condition as markets recover. Now let me turn it over to Ron to provide some brief remarks and then Michelle from. Thank you, John, and good morning, everyone. I’m very excited to be part of the MKS team to execute our strategic plan. It’s obviously early days at this point, but let me share of MKS is technology driven secular growth company. The breadth of our product offering and with the execution capabilities of the MKS team puts the company in an enviable position that enables today’s advanced electronics devices. In the past few weeks, I have tremendous respect for their knowledge of the business and the ability to execute see great value in the talent, culture and discipline here at EmCare have a deep bench of finance and accounting professionals with a mosaic of talent. We have a good mix of several tiers and veterans with in-depth knowledge of MKS. My focus will be on maintaining our cost to serve. We will continue to maximize cash generation to support our cash flow occasion strategy, which will primarily be in CapEx to support our business strategy. We will remain focused on improving our overall cost structure to ensure that we are well positioned to take full advantage of the semiconductor growth. With that, let me turn it over to Michelle to review our financial results for the quarter. Thank you, Ron, and good morning, everyone. For the third quarter and cancer reported revenue percent sequentially and at the high end of our guidance range, driven by better than expected Semiconductor third quarter semiconductor revenue was $378 million, up 3% both sequentially and year over year. The result was above the consistent with the first half of the year. We executed on strong in quarter demand, especially as it related to the third quarter. Electronics and packaging revenue was $231 million, an increase of 1% quarter over quarter and also about the high end of our expectations. This was offset by lower equipment sales, which were in line with our expectations on a year-over-year basis, mainly due to palladium prices as well as natural variability in our equipment business. Chemistry sales grew 7% year over year, continuing a gradual recovery trend. Industry-wide softness in our specialty industrial market, third quarter revenue, 10% sequentially in just below our guidance. Midpoint, revenue was down 11% from industrial weakness consistent with the prior quarter. We observed minor and mostly offsetting fluctuations throughout the multiple. And turning to margins, we reported third quarter gross margin of 48.2%. Margin was up sequentially due to product mix as well as operating leverage on higher revenues. We continue to prudently manage our costs with third quarter operating expenses have to change. We have a strong track record of management structure throughout market cycles, term profitability and cash generation. Looking ahead, we expect operating expenses will increase modestly from Q3 levels due to compensation costs, including the timing of new planned hires as well as certain third party spend, yielding an operating margin of 21.8%, both well above our guidance and prudent operating expense management. Third quarter adjusted EBITDA was 232 million and also above the high end of our expectations, with a 25.9%. Margin was $53 million, slightly favorable to our guidance of $54 million, reflecting a decrease third quarter net earnings were $116 million, or $1.72 per diluted share and operating performance I just detailed and a lower than expected tax rate, free cash in percent of revenue, demonstrating the cash flow generation potential of the business as a top line expands, and we continue to prudently manage working capital flow through to the bottom line and higher cash flows, allowing us to accelerate our deleveraging 1 billion of liquidity comprised of cash and cash equivalents of $861 million or $35 million. We exited the quarter with gross debt of 4.9 billion based on our trailing 12-month adjusted EBITDA of 895 million. We continue to prioritize deleveraging our balance sheet while managing the cash and investment needs of the business in voluntary prepayment on our term loan B, in connection with our repricing voluntary prepayment of $216 million on our euro-denominated term loan B, these actions underscore our continued focus perspective around the impact of our debt actions. This year, we entered 2024 with an annual interest expense with the actions we’ve taken year to date and favorable movements in Europe or rate for the third for over $100 million to approximately $220 million. Dividend $0.22 per share were 15 million. With that, I’d like to turn the call back over to John, who will review our outlook. John fourth quarter outlook, we expect revenue of $9 by end market. Our fourth quarter outlook is as follows. Revenue from our semi billion plus or minus $15 million. Revenue from our electronics and packaging market expected to be 240 million plus or minus 10 million revenue from our specialty million plus or minus 15 million. Based on anticipated revenue levels, gross margin of 47% plus or minus 100 basis points. We expect $4 plus or minus 5,000,006 million dollars plus or minus 23 million. We expect the tax rate of approximately six favorable discrete tax items in the quarter from bringing our full-year tax rate to just under 16, expect fourth quarter net earnings per diluted share of $1.95 plus or minus $0.32. Our execution has remained strong despite the cyclical challenges in our end markets capitalize on opportunities that lie ahead.
With that, operator, please open the call for Q&A. Thank you.

Operator

At this time we will conduct a question-and-answer session. Star one on your telephone and wait for your name to be announced. To withdraw your question, please press star, one Q. and A. roster.

Our first question comes from the line of Matthew personnel of catheter line is now open. Just maybe to start on your semiconductor business came from utilization rates, their business ordering patterns of 2025 downticks? Mads, John, thanks for the question. Utilization rates pick up. Certainly HBMDRAM. utilizations have been great. Logic and Foundry at certain customers remains very strong and then and remains muted. So I think the views have come down over the year, but it’s still a generally and appear and still remains muted and depends on when that turns. Both foundry logic, Dram seem to hold up well in 2025 as well, Crystal progress in the photonics initiatives. And and then also given the given the push-outs experienced by our own expectations around your new photonics one and subsequent duration of that margin headwind, thanks. Talked about last quarter, photonics, when the five if you metrology inspection space, as you know, certainly the lead times systems are much longer than in the vacuum short term. I don’t think there’s really any effect because the lead times are quite long for our stuff is was demands will determine what the long term these are metrology tools and inspection tools. So I think our point is there’s lots of opportunity there to, again make because we can bring more tools in the toolbox, integrating different kinds of technologies together are very excited about our growth and world-class assets initiative as well as of WFE. Very helpful. Thank you. Thanks, Matt. Our next question comes from the line of Steve Barger at KBCM. Your line is now open. At the looking at about 100, 20 basis points sequentially. Is that mix or can you talk through what the swing factors are around? Some question, it is mix we expect to deliver as we just said, that a lot of that is driven by equipment. So we did see some orders in Q2, three, four equipment related to a I and the segments of the PCB industry, the HDI., the MLP and then the package substrate. And you need a package substrate. Of course, that’s the highest part of the PCB industry. But then you’ve got to put it on HDI. and then we’ll be boards. And so I was quite an ordering for those applications into Q4. And as you know, equivalent gross margin is slightly lower than the chemist, sorry. So that’s really part of it. It’s really that mix encouraging, but a little lower margin on the equipment and you’re coming into a situation where markets are recovering, but there’s still some uncertainty. How are you going to balance cost control about inventory levels, just to make sure that service levels are high. Maybe just talk about what’s your price? Yes. Thanks to this. A great question. I think it’s always a balance between making sure your long-term strategic plan initiatives are well funded and resourced. So we have Bloom and my immediate focus will be to make sure that continues the margin, but we have demonstrated keeps growing so that we can strengthen our balance sheet will remain our focus here. I would add to see that we really invest how fuel service to service. The growing power point is always a balance. But so we are certainly very aggressive in putting some examples where our Power five years ago and world-class optics more recently that come about as the markets change. Yes, just to add one more thought to are not starving our CapEx or will you continue to invest in the business both in search, so those activities and focus will continue? Thanks.

Operator

Next question comes from the line of Jim Ricchiuti of Needham & Co. Your line is now open for screen. Go on for Jim.

Jim Ricchiuti

Thank you for taking the questions. Could you elaborate on what the primary industrial MRO and and could you remind us what here of supply for enabling easy?
Thanks for your question, Chris. So you’ve always seen and that’s not a surprise. That’s one of revenue has been pretty stable, though, even in this muted in GMS business in the kind of brake calipers and decorative type of things that go into Kevin, broken out EV versus ICE. I think there’s a lot of opportunities that are routing. So those are opportunities, tailwinds and then some things go away, such as you perhaps as much chrome on the front of the grill, that EV.s offer a VMS business. And that’s not even adding part for automotive. It’s really still not electronics business so far. So automotive unit, this there seems to be holding up pretty steadily. Thank you. That were not worrying about in terms of WFE spend in on in China in terms of how much your business in semiconductor either directly or indirectly on it? Sure. You know, in 2020 to October 2022, that’s one of the ability to sell directly to specific equipment OEM customers in China. So those numbers are out of our numbers now. They’ve been out for two years now. So so there’s no additional risk besides just the normal WFE market and OEMs as well as us, others. And as a ship to China, then that’s where our revenue comes from. The exposure is much more in line with the market exposure, not anything particular to MKS. Thank you very much. Thanks, Chris. Thank you. Oil crude oil.

Hi. Thanks for making the ask-a-question. This. I’m just wondering how the season that all just big picture on 2025 on WE HAVE from the China restrictions and the SEC acquisitively. Yes. I think your first part was about there is always a little seasonality to our chemistry that consumer product cycle to it. So chemistry was here in Q3 as well. So that was that normal seasonality rate a little bit in Q4 just because of seasonality. But as you because we just talked about E & P’s. So. So those are puts and takes the seasonality with respect to the election change anything and now serving others. Last smarter people that can have opinions vary in terms of how the GOP the opinion that that’s been a bipartisan, the United States treats that. And so we don’t expect any change from the particularly strong options. So whatever that was going to be going forward, we don’t expect that to change too much. Wondering if I was wondering, planning in terms of P&L in terms of leverage in the balance sheet. Thanks. For the number one priority, we will be using our excess free cash flow focused to deals such as repricing and whatnot. If it makes sense if the market allows for So our focus focus on delevering with any excess free cash on the markets, as you can see in 2024 with a very muted market for semiconductors and electronics and packaging are two main markets. We were still able to prepay $426 million. And so there’s a lot of leverage in our model. Certainly of revenue were to go up significantly as a lot of that will flow through to the cash. The free cash flow, as Michel said, this quarter, it was 60% of revenue. Free cash flow. Thank you. Thank you, Jay. Thank you.

Operator

Our next question comes from the line of Krish Sankar, ITD. Cohen. Your line is now open.

Krish Sankar

Yes, hi. Thanks for taking my question. Had to have them. John Alm. one of the things you mentioned was a use of trend in semi business in DRAM, logic and foundry, not demand on kind of figured out. Then. Do you expect to see nonsense because some of your other component peers, like I call said that the beginning to see in oh $0.09 for the business? And kind of curious on is there a lag effect? I will begin to see anything or is it more of a 2025 event?

So thanks for the question, Krish. So we can’t comment on what other peers are seeing. We can come and what we’re seeing and I think what we’re saying is still feels very muted. Some customers are talking about upgrades and things like that. And upgrades coming couple of different flavors, right? To upgrade a significant increases in layer count. You really need new RF power, but you can also upgrade with smaller changes and that may not require a new our Astec as much as require chemistry, our cryo. So I think that all depends on what the customers see and what their customers want them to do. But right now, we see now is to keep us pretty muted. So that’s that’s all we can say about what we see.

Krish Sankar

Got it. Got it. That’s very helpful.
Armed with a quick follow-up, John, if I remember right, you said that the E & P’s strength was in flex PCB drilling. I hope I heard it right, because the question was mainly either six DCBs mainly used for smartphone end markets, but it seems like the market hasn’t quite recovered. Some benefit about what drove that strength for you in the quarter? On the E&P side. And then I just wanted to also say that our welcome to the team, Ron, I hope the intensity and what are the future of. Thank you. Thank you, Chris. Look forward to more conversations?

To answer your question, Krish, they’re actually two things that are driving the empty up quarter on quarter. It is both the flex equipment. So for smartphones, you’re right there. So we did see an increase there in bookings, and that’s going to turn into revenue the next quarter or so. And in addition to that, we saw an increase in bookings for rigid PCB equipment for chemistry related to a I so it’s actually both that are happening, Dan, and thank you. Yes, thank you.

Operator

Next question comes from the line of Joseph Moore of Morgan Stanley. Your line is now open.

Hi, this is Shane. On behalf of Joe. Thank you for letting me ask a question from my first question is how should we think about theaters, idiosyncratic gross margin tailwinds and headwinds that you’re envisioning for 2025 and two?

Yes. Gross margins in 2025. I certainly you can see that our gross margins that are slightly different by division and chemistry and the biotech acquisition has really helped keep the profitability up even during a downturn, so a down cycle. So we’re really happy about that. And it’s improved right under MKS the last two years, the gross margin for particular volume of business that I will tell it has improved. That’s also the case with the PSC is the case with DST volume will improve all of them. And so 2025 volume is higher. We should expect that 30% gross margin flow through that. We’ve talked about our model. And then, of course, the inflationary costs have come down over this year. So the PPV. is pretty much balanced. Now it’s not back to were used to be where we can always count on some kind of one or 2% lower PPV. year-on-year. But some parts of the supply chain and some parts of the materials are getting to that point as well. So right now is still in balance. And so that could be a tailwind. Of course, if inflation goes up, it’s a headwind. So those are the things we think about in terms of gross margin drivers going forward.

Got it. Thank you.

My follow-up is so non-CapEx potentially returns. How is NKS. acquisition that customer to does sort of relative to last up cycle in 2020 through 2020? Thank you very much. Yes, we believe we still have the leadership position for certainly some of the most, the most critical etch in demand with our power. And so we’re pretty confident that the next upcycle does that work that we will enjoy that with our power business. I think you’re probably talking about new kinds of power such as pulse DC that we’re working on that as well as others that will ramp to be seen as to when that gets put into production. But certainly not probably the next cycle. Thank you. Thank you.

Operator

Next question comes from the line of Joe Quatrochi with Wells Fargo. Your line is now open. Have actually in the questions.

Joe Quatrochi

I know you guys announced kind of a new semiconductor factory you’re building in Malaysia. But wondering if you could talk about one evidence that the CapEx kind of requirements there over the next few quarters, we think about excess free cash flow for debt paydown. And then also, how do we think about the mic to production?

I think a lot of your semi related production capacity is located in China? Yes, Joe, that’s a great question. So we like we announced a groundbreaking in Malaysia for another factory target towards our Semiconductor. And maybe even that’s, you know, expansion for capacity that we think we will need. Certainly you’re putting less risk in our footprint, our manufacturing footprint, and that’s certainly something our customers want to see. So those are the two reasons why we’re doing that. In terms of CapEx, I think the way to think about, Joe, is we’ve always been in that 3% to 5% level in terms of CapEx spend. So very, very low. Maybe the next year or two may edge up towards the five because we’ve got a couple of factories being built for good reasons. But this past year, I think we’ll be in that 3% range. And then it could also be between three to five, but still quite a low CapEx intensity model that we have. That’s helpful. And then I guess I know you guys obviously guided December, but how do we think there’s anything and call on terms of seasonality into the March quarter? The March quarter usually is a little lower from a consumer product cycle standpoint. That’s true. So that’s typically what we would see in part of our CAT MSD. Outotec business. I’m just like we saw an uptick in Q three so that that’s the expectation.
Things can change. Certainly a new product release of some sort of change there. And I think the only kind of difference is equipment equipment is not necessarily consumer products cycle, right? It’s just it’s an investment cycle and capacity cycle. And so that’s where we see kind of a Q4 uptick in E and P because of not just flex equipment, but also rigid equipment. And it means we see what that will be in Q1. Got it. Thank you. Thanks, Joe. As a reminder to ask a question or an additional question, you’ll need to press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one again.

Operator

Our next question comes from the line of Melissa weathers at DB. Your line is now open.
And I thank you for letting me ask a question and look forward to working with you, Rob. And I think I heard in your preamble that you talked about a back end when for each beyond. And can you give us anymore color on what that is, how big it can be on? And do you expect any other similar wins? Yes. Thanks, Melissa. The the HPM when we talked about with lasers and so lasers it can be used are used to do cutting of chips. That’s not news, but of HBM. type of guy, you’re putting dies on top of each other. And so precision and finance of the hedges and all that are giving laser makers U.S. opportunities because the more precise you can make those cuts so better yield you’re going to have on those kinds of chips. So and we called out one particular customer pretty significant. But you know, Amcast pretty big. So both Fertilizer Group, if Kent and it’s not just point customers. So it’s multiple cust (technicall difficulty)